The Bank of England has delivered a blow on the eve of Brexit by slashing its growth forecasts for the next three years, but held off from cutting interest rates amid signs of a recent pick-up in the economy.
Members of the Monetary Policy Committee (MPC) voted seven to two to hold rates at 0.75%, despite recent speculation that a cut was on its way.
The Bank revealed in its quarterly forecasts that it is expecting the economy to have flatlined at the end of last year and made a significant downgrade to the growth outlook – to 0.8% in 2020, 1.4% in 2021 and 1.7% in 2022.
It had previously predicted growth of 1.2%, 1.8% and 2% respectively.
But it said recent survey data pointed towards a “near-term recovery” in growth after the decisive Conservative election win and easing Brexit uncertainty.
The Bank is estimating growth will edge up to 0.2% in the first three months of 2020.
It stressed that a rate cut could still be on the cards if growth does not recover as expected.
In minutes of the MPC meeting, the Bank said: “Since the December meeting, international developments had been positive and the most recent UK data supported the forecast of a near-term recovery in growth.”
It added: “Policy might need to reinforce the expected recovery in UK GDP (gross domestic product) growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak.”
The growth forecasts will make for painful reading for the Government, coming a day ahead of Brexit on January 31.
It also marks the decision for outgoing Bank Governor Mark Carney, who is handing over the reins to Financial Conduct Authority boss Andrew Bailey on March 16.
The Bank’s forecasts are based on the assumption of a smooth Brexit, but cliff-edge fears have remained at the fore after Prime Minister Boris Johnson legislated against extending the transition period beyond the end of this year.
The MPC minutes show that Jonathan Haskel and Michael Saunders remained the sole dissenters on the committee, defying expectations for more policymakers to join them in calling for a cut.
Financial markets had at one stage priced in a more than 60% probability of a rate reduction after gloomy year-end economic data, though odds had been trimmed recently on strong UK jobs figures and more cheery sector survey results.
The Bank’s forecasts showed inflation – currently running at a three-year low of 1.3% – remaining below the 2% target throughout 2020.
It predicts inflation will pick up to 2% by the end of next year, but added there are risks that it could be slower to pick up.